Fortnightly - variable-costhttps://www.fortnightly.com/tags/variable-cost
enFor the Peoplehttps://www.fortnightly.com/fortnightly/2013/09/people
<div class="field field-name-field-import-deck field-type-text-long field-label-inline clearfix"><div class="field-label">Deck:&nbsp;</div><div class="field-items"><div class="field-item even"><p>Former Progress Energy CEO checks in from his new job at TVA.</p>
</div></div></div><div class="field field-name-field-import-byline field-type-text-long field-label-inline clearfix"><div class="field-label">Byline:&nbsp;</div><div class="field-items"><div class="field-item even"><p>Michael T. Burr, Editor-in-Chief</p>
</div></div></div><div class="field field-name-field-import-bio field-type-text-long field-label-inline clearfix"><div class="field-label">Author Bio:&nbsp;</div><div class="field-items"><div class="field-item even"><p><strong>Michael T. Burr</strong> is <em>Fortnightly’s</em> editor-in-chief. Email him at <span class="s1"><a href="mailto:burr@pur.com">burr@pur.com</a></span></p>
</div></div></div><div class="field field-name-field-import-volume field-type-node-reference field-label-inline clearfix"><div class="field-label">Magazine Volume:&nbsp;</div><div class="field-items"><div class="field-item even">Fortnightly Magazine - September 2013</div></div></div><div class="field field-name-field-import-image field-type-image field-label-above"><div class="field-label">Image:&nbsp;</div><div class="field-items"><div class="field-item even"><img src="https://www.fortnightly.com/sites/default/files/FR-WilliamJohnson.jpg" width="1180" height="1500" alt="William Johnson, TVA: “If there’s a better way to serve the Tennessee Valley region, then we ought to support that. I think it will be hard to find a better way.”" title="William Johnson, TVA: “If there’s a better way to serve the Tennessee Valley region, then we ought to support that. I think it will be hard to find a better way.”" /></div></div></div><div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"><p>Each year in September, we examine the industry’s performance for shareholders, via the annual <a href="http://www.fortnightly.com/fortnightly/2013/09/fortnightly-40-best-energy-companies"><i>Fortnightly 40</i> report</a>. This year, we spoke with senior executives at several investor-owned utilities – Cleco, NorthWestern Energy, OGE Energy, and Wisconsin Energy – to get their perspectives on market forces facing the industry, and the effects on shareholders.</p>
<p>For a different perspective, we also spoke with a former IOU executive who made the switch to the world of public power. William Johnson was CEO of Progress Energy until the company merged with Duke Energy. Although he was expected to become CEO of the new company, the board of directors changed plans on the day the merger closed, in July 2012. Those changed plans sparked an investigation and settlement agreement at the North Carolina PUC. Meanwhile, in November 2012, the Tennessee Valley Authority named Johnson its new CEO.</p>
<p><i>Fortnightly</i> spoke to Johnson about his new job at TVA, about the differences between public power and investor-owned utilities, and about his vision for the future of America’s largest government-owned power provider.</p>
<p><b>FORTNIGHTLY</b> What do you see as TVA’s primary strategic goals in the years and decades ahead? How are these goals different from those of the past?</p>
<p><b>Johnson:</b> One of the great benefits we have as a public power utility is our mission. The reason for our existence is written down in federal statute. There’s not a lot of question about what we’re supposed to be doing every day. We will hew to that mission, which is all about improving the quality of life in the Tennessee Valley through development and stewardship across a broad set of activities. My goal is to keep doing that mission in a way that’s more efficient and more effective. But you can’t find a better mission than the one we have here.</p>
<p><b>FORTNIGHTLY</b> The Baker Center recently released a report (<a href="http://bakercenter.utk.edu/wp-content/uploads/2013/05/Policy-Brief-TVA-May-2013.pdf">http://bakercenter.utk.edu/wp-content/uploads/2013/05/Policy-Brief-TVA-M...</a> ) on the prospect of privatizing TVA. It seems like this question comes around every decade or so, and it never seems to get very far – probably because of complexities like those the Baker Center identified. What’s your perspective on privatizing TVA, and what it means for your plans?</p>
<p><b>Johnson:</b> You’re right, it does come up every decade or so. My view is this: TVA is owned by the people of the United States, and their elected representatives get to decide our future. In the shareholder world, you do a strategic review every year or so. At TVA we’re part of a collaborative process of review, looking at options. If there’s a better way to serve the Tennessee Valley region, then we ought to support that. I think it will be hard to find a better way. The integrated fashion in which we do resource management and produce power, once you take that apart, you lose a lot of efficiencies. New cost centers arise.</p>
<p>I’m looking forward to opportunities to demonstrate the value of this model, and how well it can serve in the future. We’ve had several meetings with OMB [the Office of Management and Budget] and others. It’s still in formative stages, so I don’t have any prediction about how it will come out.</p>
<p>I’ve done my own strategic review over the last six months, including looking at the structure and considering models for what we need to do differently. Like most power producers nationwide, we’ve seen a significant decline in demand and sales. I think it’s more pronounced here than in many parts of the country. You might have read that USEC [U.S. Enrichment Corp.] was shutting down [plants in Ohio and Tennessee]. That’s our largest customer. We’ve had declines in demand, and at the same time spending has increased.</p>
<p>Job 1 is to live within our means. We need to become more efficient and effective, and focus on our costs. We have a very simple business model here: we recover our costs from customers. That means when our costs go up, our rates go up. We desire low rates here, so we can continue to have economic development and job growth. So my first priority is to live within our means, to continue keeping rates low and attracting good jobs to the region.</p>
<p>As part of that we have to decide what to do in terms of resources. The generation plan looks very different today from even a few years ago, as we consider what assets to retire and what assets to modernize. We’re looking to defer or avoid as much growth capital as we can, while retaining high reliability. The basic exercise is good old-fashioned cost management and resource planning.</p>
<p><b>FORTNIGHTLY</b> In addition to cost control, what major issues will affect TVA’s performance in the future?</p>
<p><b>Johnson:</b> A lot of utilities face the same issues, but we have them in a little more expanded form. For example, Fukushima and its effect is particularly important to us, because our nuclear plants are downstream of our hydro dams. So we are very focused on dam safety, stability, and flood protection, making sure safety systems are operable in a probable maximum flood. That will be a focus for us in the next five years.</p>
<p>Also like other utilities we’re dealing with current environmental regulations that mostly affect coal. We expect more regulation of coal plants and that will continue to be an issue.</p>
<p>Evolving technology is of great interest to us. One of our statutory mandates is innovation in energy technology. There’s a law in technology [<i>Amara’s law</i>]: you tend to overestimate the effects of new technologies in the short term, and underestimate the effects in the long term. That’s the case, for example, with renewables and distributed generation (DG). Those things are on the horizon, and the electricity industry has to be thinking about them. How do we integrate them? How do we do pricing? Most pricing today is variable-cost pricing on a kilowatt-hour basis. Do we need to think about recovering fixed costs in a different way? All of that is swirling around us.</p>
<p>Of course it raises issues about the effects on revenue. This is a high fixed-costs business, and you’re always worried about things that upset the equation. On the other hand, we’re interested in serving customers and keeping bills low. We’re interested in efficiency and demand response, simply to lower people’s bills.</p>
<p>At TVA we tend to embrace technology change more than many utilities do. Microgrids and DG are new elements in a system that we’ve been operating for 80 years. It will take us a while to figure out how to incorporate them and have revenue left to cover costs.</p>
<p>In just the last six months I’ve seen a different way of thinking about renewables, DG, and microgrids – not just on an economic standalone basis, but as part of a bigger, integrated supply question. It’s a new twist on these things. Renewables and microgrids can stand together. It’s a good way to look at it, and we look forward to being a part of that discussion.</p>
<p><b>FORTNIGHTLY</b> What’s your view on natural gas and its expanding role as a power fuel? How does the gas price curve affect TVA’s resource plans?</p>
<p><b>Johnson:</b> It’s had a pretty significant effect. For years TVA was coal-centric. A couple of years ago we got 55 percent of our power from coal. Over the last couple of years, with the addition of about 4,000 MW of new combined-cycle gas-fired plants, and plans to retire at least 2,700 MW of coal plants, we do see gas replacing older coal units.</p>
<p>We have some hope of stability over the next decade for gas prices. I think there will be some new regulations around fracking, but they won’t be significant enough to change the basic dynamics of gas pricing. It will continue to be the option of choice. With low capital costs on a megawatt basis, as long as you can take the volatility out of the fuel price, it continues to be a really good option.</p>
<p>A lot of people are sitting on the sidelines. If they had to build new capacity, they’d put in gas-fired plants. But given flat demand, they’re waiting to see what happens next.</p>
<p><b>FORTNIGHTLY</b> TVA recently announced budget cuts and personnel reductions associated with the Bellefonte nuclear construction project. What’s the significance of that, and how does it fit into TVA’s overall nuclear strategy?</p>
<p><b>Johnson: </b>At the moment we’re focused on finishing a nuclear plant, Watts Bar 2. It’s scheduled to be completed and go commercial in the second half of 2015. We have to proceed at Watts Bar, but uncertainty about demand and usage suggests we don’t need Bellefonte as much as we did two or three years ago.</p>
<p>I look at it as husbanding capital, and optionality. We’re focused on finishing Watts Bar 2 on time and on budget, and we’ll continue keeping the Bellefonte option viable, while we wait for more clarity around the fundamentals.</p>
<p><b>FORTNIGHTLY</b> We’ve seen some federal initiatives to move forward on various solutions for spent fuel management. What’s your perspective on that?</p>
<p><b>Johnson: </b>We do no advocacy or lobbying work, so I have no position on any legislation or idea. But the real question we should be asking ourselves as a nation is whether we want to remain in the nuclear power business. If we do, then we have to solve the issue for used fuel. Most people would agree it’s best stored in a couple of locations rather than hundreds of locations. We need to solve that.</p>
<p>I think we need to stay in the nuclear business, because eventually we will have to deal with CO<sub>2</sub>. Nuclear energy is an important piece of that. Also we need to continue dealing with non-proliferation efforts, and staying in the nuclear world makes us an active voice in that effort.</p>
<p>When we get to 2030, many nuclear reactors will be retiring. By 2060, 95 percent of the current nuclear fleet will be retired. So it’s a question we need to start embracing. Do we need to be in the nuclear business? Really we don’t have a choice. We need to be. Once you decide that, it makes it easier to move forward. But how do we make that decision stick? I have no idea. All major decisions ultimately are political questions.</p>
<p>Our country and our government works well when we need to do something. I don’t want to see us get to the point of crisis on this issue, but sooner or later America will have to address the question of whether we must stay in the nuclear business. Once we make that decision, then like minds will agree about what the fuel cycle should look like.</p>
<p><b>FORTNIGHTLY</b> How are you finding your job of managing TVA? How is it different from your experience at Progress Energy?</p>
<p><b>Johnson:</b> The mechanics of the business are the same, in terms of power production and operations. The big differences involve who your stakeholders are. In the IOU model, you’re serving customers for the end result of serving your shareholders. That’s a good model and I’m proud to have been involved with it. But in our model we’re serving the people directly. Our end objectives are a little different. We’re always trying to lower costs, lower rates. It’s a more direct association with our customers – 155 local power companies and more than 50 directly served large industrial end users.</p>
<p>When you get into one of our facilities, engraved in the stone is this phrase: “Built for the people of the United States.” That model and mission has a little different feel.</p>
</div></div></div><div class="field field-name-field-article-category field-type-taxonomy-term-reference field-label-above clearfix"><h3 class="field-label">Category (Actual): </h3><ul class="links"><li class="taxonomy-term-reference-0"><a href="/article-categories/nuclear-fuel-cycle">Nuclear Fuel Cycle</a></li><li class="taxonomy-term-reference-1"><a href="/article-categories/management-leadership">Management &amp; Leadership</a></li></ul></div><div class="field field-name-field-members-only field-type-list-boolean field-label-above"><div class="field-label">Viewable to All?:&nbsp;</div><div class="field-items"><div class="field-item even"></div></div></div><div class="field field-name-field-article-featured field-type-list-boolean field-label-above"><div class="field-label">Is Featured?:&nbsp;</div><div class="field-items"><div class="field-item even"></div></div></div><div class="field field-name-field-department field-type-taxonomy-term-reference field-label-above clearfix"><h3 class="field-label">Department: </h3><ul class="links"><li class="taxonomy-term-reference-0"><a href="/department/frontlines">Frontlines</a></li></ul></div><div class="field field-name-field-fortnightly-40 field-type-list-boolean field-label-above"><div class="field-label">Is Fortnightly 40?:&nbsp;</div><div class="field-items"><div class="field-item even"></div></div></div><div class="field field-name-field-law-lawyers field-type-list-boolean field-label-above"><div class="field-label">Is Law &amp; Lawyers:&nbsp;</div><div class="field-items"><div class="field-item even"></div></div></div><div class="field field-name-field-tags field-type-taxonomy-term-reference field-label-above clearfix">
<div class="field-label">Tags:&nbsp;</div>
<div class="field-items">
<a href="/tags/progress-energy">Progress Energy</a><span class="pur_comma">, </span><a href="/tags/william-johnson">William Johnson</a><span class="pur_comma">, </span><a href="/tags/duke">Duke</a><span class="pur_comma">, </span><a href="/tags/north-carolina">North Carolina</a><span class="pur_comma">, </span><a href="/tags/tennessee-valley-authority-0">Tennessee Valley Authority</a><span class="pur_comma">, </span><a href="/tags/baker-center">Baker Center</a><span class="pur_comma">, </span><a href="/tags/privatization">privatization</a><span class="pur_comma">, </span><a href="/tags/usec">USEC</a><span class="pur_comma">, </span><a href="/tags/business-model">business model</a><span class="pur_comma">, </span><a href="/tags/cost-control">cost control</a><span class="pur_comma">, </span><a href="/tags/fukusihma">Fukusihma</a><span class="pur_comma">, </span><a href="/tags/hydro">Hydro</a><span class="pur_comma">, </span><a href="/tags/dam-safety">dam safety</a><span class="pur_comma">, </span><a href="/tags/flood-protection">flood protection</a><span class="pur_comma">, </span><a href="/tags/amara%E2%80%99s-law">Amara’s law</a><span class="pur_comma">, </span><a href="/tags/renewable">Renewable</a><span class="pur_comma">, </span><a href="/tags/distributed-generation">Distributed generation</a><span class="pur_comma">, </span><a href="/tags/variable-cost">variable-cost</a><span class="pur_comma">, </span><a href="/tags/microgrid">Microgrid</a><span class="pur_comma">, </span><a href="/tags/natural-gas">Natural gas</a><span class="pur_comma">, </span><a href="/tags/fracking">fracking</a><span class="pur_comma">, </span><a href="/tags/bellefont">Bellefont</a><span class="pur_comma">, </span><a href="/tags/nuclear">Nuclear</a> </div>
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Sun, 01 Sep 2013 19:37:56 +0000meacott16746 at https://www.fortnightly.com